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The Chinese economy found its feet in August, with inflation remaining subdued as exports rose more than expected, giving a rosier outlook for the second half of the year.
Consumer prices rose 2.6 per cent from a year earlier, just a touch below July’s 2.7 per cent pace, the statistics bureau said on Monday. Inflation is unlikely to pass the 3 per cent threshold in 2013, leaving it well within the government’s comfort zone and beneath its official “upper limit” of 3.5 per cent. * * * *
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The data follow trade figures released on Sunday that showed a 7.2 per cent jump in exports and a 7 per cent rise in imports for August, beating expectations and pointing to firmer third-quarter growth than had previously been expected.
Meanwhile, producer price inflation, which has been negative since March 2012, improved, giving some hope to Chinese manufacturers struggling with slumping margins and excess capacity. The producer price index, a measure of the prices of goods when they leave factories, declined 1.6 per cent from a year earlier in August, firming from July’s 2.3 per cent fall.
Still, metals and steel prices remained depressed compared to a year ago, adding to the woes of industrial firms burdened with heavy debt loads.
With economic growth weak, price pressures are expected to remain subdued in China for some time. Beijing has long said it accepts the need for the Chinese economy to move to a more sustainable rate of growth, a stance reiterated by Premier Li Keqiang:
“We can no longer afford to continue with the old model of high consumption and high investment. Instead, we must take a holistic approach in pursuing steady growth, structural readjustment and further reform,” Mr Li wrote in the Financial Times on Monday.
Nonetheless, the government blinked this summer, introducing targeted measures to arrest the growth slowdown, including temporary tax cuts for small businesses, investment in railways and low-income housing and streamlined customs procedures. The economy in July responded with a mild rebound that appeared to rely heavily on construction and investment – the opposite of Beijing’s stated goal of rebalancing the economy more towards consumption and services.
“There has been an improvement in sentiment, due to the recent policy moves,” said Xianfang Ren, a Beijing-based economist with IHS Global Insight.
The “mini-stimulus” fed through to a mild increase in consumer prices in August on a month-to-month basis. Consumer prices have been steadily climbing since May, driven in particular by pork, China’s staple meat. The cyclical tightening in the hog market follows a glut last year, when novice pig breeders sustained severe losses. Fruit prices also rose.

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It has become the received wisdom of Europe’s political classes: until the German general election later this month nothing much will happen – and then, hey presto, at 12.01am on September 23, the world will be a different place.
Do not get your hopes up. Rather than delivering a momentous breakthrough, opening the way for movement on the crisis still gripping Europe, I see the real gridlock starting right at that moment. Instead of looking at the impact of the German elections on Europe, we should look at the impact on Germany. On the basis of the polls, even allowing for plenty of statistical wiggle room, it is hard to conceive of a scenario in which Germany could end up with a stable government for four years. There is only one such scenario I can think of – but this is at present not considered a high-probability event. * * * *
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The reason for this lies in a combination of the fiddly arithmetic of German elections and the balance of power in the Bundesrat, the upper house of parliament where the regional states are represented. Right now there are five parties in the Bundestag, the lower house. On the centre-right are the Christian Democrats of Angela Merkel, the chancellor – who sit as one group with their Bavarian sibling, the Christian Social Union – and the liberal Free Democrats; to the left are the Social Democrats, the Greens and the Left party. The latest polls suggest a sixth party might also have an outside chance of joining them: the Alternative für Deutschland, the only party that favours an exit from the euro.
The polls have been favouring a narrow majority for the present centre-right coalition of CDU and FDP. But these parties do not have a majority in the Bundesrat and, given the electoral cycle for state elections, such a majority will be elusive for at least another three years. It is hard to see how the present coalition could govern, especially as I would expect that should the SPD remain in opposition they would be much less supportive of Ms Merkel’s eurozone policies than they were in the outgoing legislature. The SPD rank and file would be sorely tempted to defy the party’s mostly centrist leadership and move left to embrace more populist positions.
The alternative favoured by many is that typically European arrangement: a grand coalition of the two biggest parties that sees almost everyone end up on the government benches. The CDU and the SPD would have a comfortable majority in both houses of parliament.
A grand coalition would only occur if the CDU and FDP fail to get a majority. This in turn implies that the parties of the left have a majority in a five-party parliament. The latter is only a hypothetical majority because the SPD has ruled out a coalition with the Left party – for now. But the Social Democrats could change tack during the parliamentary term. So, Ms Merkel would have a partner who could bail out at any time to form a three-way coalition of the left, or a two-party minority government with the Greens, tacitly supported by the Left party. The latter has been tried at regional level, where it has been a great success for the SPD. The temptation for the party to end Ms Merkel’s reign at some point in the next four years will be hard to resist.
I do not believe that the SPD would form a three-party coalition of the left right away. To do so would be dishonest after the promises the party has made. This leaves as the two most probable scenarios either an unstable government of the centre-right, which has no majority in the upper house, or an unstable grand coalition, which could fall apart at any moment. Neither might survive a full term.
What does this mean for the rest of Europe? In the first scenario, the German government will have even less room for manoeuvre in the eurozone crisis. A grand coalition may look more pro-European – but be careful what you wish for. Gridlock may swiftly return as a permanent threat of new elections hangs over such a coalition. Soon we might hear again that we have to wait until after the next German elections.
The only scenario in which you can see any form of stability is one where both the AfD and the FDP win more than 5 per cent of the votes, the threshold for parliamentary representation. Then the Bundestag would have six parties and neither the CDU and the FDP, nor the SPD, Greens and the Left would have an absolute majority. In that case, the grand coalition would be the only option – and it would be stable. None of the partners would have an incentive to leave. It would be similar to the grand coalition of Ms Merkel’s first term in 2005-09. The problem with that is long-term. The AfD might become a stronger force, pushing the CDU to a more eurosceptic position.
The ultimate irony is that a necessary precondition for a continuation of Ms Merkel’s current policies – whatever you may think of them – is the election of an anti-European party. If the AfD fails to clear the 5 per cent hurdle – which is what most observers, including me, expect – then it is hard to see any constellation that delivers stability to German politics. The next four years promise to be very different from the last.